Valuation
is a topic that fascinates most of us and derivative valuation
is even more interesting because of its complexity and popularity.
Presently the derivative valuation software business comprises
of $5 bn and is growing at 22% every year and is expected
to grow further. The only concern of the software industry
is the shortage of qualified professionals in derivative
valuation.
Derivative
valuation ranges from relatively undemanding binomial models
to more complex Black-Scholes model, Blacks model and digital
contracts. Bernoulli's famous St. Petersburg paper of 1738
on the theory on pricing of financial assets can be considered
as a pioneer in asset pricing theory. Derivative valuation
became a more serious concern after the derivative accidents
of 1993 and 1994. There is a greater emphasis on declaration
by the regulating bodies across the globe. The new regulation
has forced organizations to be more transparent in the use
of different derivative increments and declare how they
can be used to minimize risk and yield enhancement. As a
logical extension to the Securities Exchange Commission's
disclosure requirement on market's risk sensitive instruments,
the recently introduced Statement No. 133 accounts for Derivative
Instruments and Hedging Activities.
The
main issue with derivative valuation is that each instrument
needs different valuation insight. The technique of modeling
differs according to the underling assets and the nature
of the instrument.
Risk
neutral derivative valuation is also considered as an important
tool in derivative valuation since its introduction in 1980.
The existing theory of derivative valuation has addressed
the key ideas of mean variance optimization, equilibrium
analysis and no-arbitrage arguments, but there are lots
of issues to be addressed. It is in our interest that we
look at a few more contributions in this area of derivative
valuations.
This
issue comes out with five papers. The first paper, "A
Lattice Option Pricing Model for Multiple Assets Under Complete
Market Assumption", brings out the method to handle
correlations in multiple assets. The second paper, "Interaction
Between Eqity and Derivatives Markets in India: An Entropy
Approach", looks at the temporal relationship between
equity and derivatives. It uses the entropic analysis and
transfer entropy to study price dicovery in the Indian Stock
Market. The third paper, "Moment Methods for Exotic
Volatility Derivatives", looks at the moment methods
of exotic derivatives. The forth paper, "Valuation
of Nifty Options Using Black's Option Pricing Formula",
discusses Black's option pricing formula and its application.
And, the last paper, "Equity Derivatives in India:
Growth Pattern and Trading Volume Effects", looks at
the growth pattern and trading volume effects of equity
derivatives in India.
-
Sharon K Jose
Consulting
Editor
